Question
2. A stock is expected to pay a dividend in one year of $2 per share. It is expected that dividends after that will grow
2. A stock is expected to pay a dividend in one year of $2 per share. It is expected that dividends after that will grow at a constant rate of 3% per year. Returns on the stock have a correlation with the market of 0.35. The standard deviation of the stocks returns is 0.3, and the standard deviation of the returns to the market is 0.15. The yield on treasury Bills (i.e. the risk-free rate of interest) is 4% and the expected risk premium (i.e. expected return above that of T-bills) on the market is 8%. [13 Marks]
a. What is the value per share of the stock?
b. If the current price of the stock in the market is $20, would you recommend buying or selling this stock?
c. Based on the current market price of $20, would this stock plot above, below or on the Security Market Line (SML)?
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